Wednesday, October 24, 2012

You know a startup is likely to fail when its product strategy or business plan includes multiple miracles.

What Is A Startup Miracle?
A startup miracle is the key difficult thing you need to pull off for your startup to work.

It could be hitting product/market fit, a key business deal, a specific regulatory change, or the like. If your startup needs zero miracles to work, it probably isn't a defensible startup. If your startup needs multiple miracles, it probably isn't going to work - with every miracle, you are multiplying in another low probability event to get an even smaller expected outcome.

Single Miracles Are Hard To Pull Off
Miracles are by their nature difficult to achieve. Every successful startup has at its heart a miracle. For AirBnB, it was getting to market liquidity in supply/demand for rooms & spaces in a repeatable way. For Microsoft, it was the IBM O/S deal. Most startups die before they ever attain their miracle.

Multiple Miracles Should Be Avoided
Entrepreneurs often fail when they define an end goal and then come up with a multi-step, multi-miracle driven logical chain to get there.

An example would be: Our goal is to become the replacement for Yelp.Step 1: Launch a mobile app, focused on concerts and music. We plan to get to massive distribution for this mobile music app. (Miracle #1)Step 2: Once we have millions of users using us for concerts, we can add other types of local content, including businesses. Since we have millions of users, they will undoubtedly use us for local content as well (Miracle #2). This will allow us to beat Yelp.

In this example, the concerts product has nothing to do with beating Yelp. It is viewed as a leverage point to get to the situation where, maybe, you could add a Yelp-like product. Given how hard it is to get to any sort of product/market fit, the company is likely to die trying to win at concerts. It will never get to the point it can try to overcome another obstacle and compete with Yelp. The first miracle is likely to kill the company before it can even try to fulfill the second miracle.

This is very different from "we are going to beat Yelp by providing a better local content experience on mobile" and then focusing excruciatingly on this singular goal. Product/market fit is still equally hard to achieve, but you only need to achieve it once.

Only Work On Single Miracle Startups
If your startup needs multiple miracles to succeed, you need to go back to the drawing board and come up with an idea or product that has only one miracle. Otherwise you are multiplying out multiple low probability events and are extremely likely to fail.

Many people delude themselves on whether they are a one-miracle, or multi-miracle startup. They way to tell is to ask yourself what your product or business end goal is. Is your approach directly focused on achieving that end goal? If not, you may have a multi-miracle plan without realizing it.

Monday, October 22, 2012

I was talking with Brian Singerman and he raised an interesting question: How many software companies have been founded in the last 10 years that are now worth more than $5 billion? Or more than $10 billion?

This has serious implications for the companies raising money at a $1-$3 billion valuation. In order to 5X they would need to achieve what only 5 companies have been able to achieve in the last decade.

Even if you assume YouTube as a stand alone would be worth more than $10 billion today, this list is surprisingly small.

There are two reasons this list is so short:

a. It take time to build real value.

Amazon, was 6 years old in 2001 when it reached its last low of ~$2.5 billion. It took it 11 additional years (17 years total) to grow to ~$100 billion market cap.

If you look at the Forbes Billionaire list as a proxy, you notice it is mainly full of old people :) . It takes a long time to build something really valuable.

b. Few companies do anything sufficiently valuable. Most companies serve a niche, or don't monetize very well. Business that can truly scale to the revenue that justifies a $5 billion+ market cap are rare (indeed, across *ALL* industries, there are only <800 companies with market caps >$5 billion).

Note:

There are a few companies founded in the last 10 years that are closing in on $5 billion or who sold within 50%. This includes Palo Alto Networks ($4 billion), Splunk ($3 billion), SuccessFactors (acquired for $3.4 billion by SAP), Palantir (I think the last round was $3-$4 billion), Dropbox (last valuation at $4 billion), Square (last valuation at $3.25 billion), and potentially Spotify.

Finally YouTube, if still stand-alone today, may be worth more then $10 billion.

Friday, October 19, 2012

First entrants into a market can have a number of advantages if their product has a network effect or other lock-in mechanism.

If you are the second mover into a market, how do you win? Some approaches:

Build Something 10X Better or Much Cheaper
When Apple launched the iPod, and then the iPhone, it had 10X better products then existing MP3 players or cell phones. Similarly, most SaaS business have a large cost differential relative to the existing enterprise software model.

Go International First
As your competitor scales they will be so focused on the US market that they will be late to internationalization. For example, GroupOn bought CityDeal (a GroupOn clone) to get a faster position in the European market. I am guessing some international first movers will get bigger then their US competitors (and maybe end up buying the US version of the company). While I am not advocating becoming a cloning shop, sometimes going International first can give you an advantage as the first mover in international markets.

Play A Different Strategic Game (Your Strengths / Their Weaknesses)
Post-iPhone, Google was second to market with Android.

However, Google took the strategy of (1) opening up the OS for modification/customization by operators and handset OEMs, (2) widespread distribution (versus the more measured carrier by carrier deal with some market exclusivity of iPhone) and (3) maintaing the brunt of handset economics for carriers and OEMs.
Google fundamentally viewed the handset OS business differently from Apple (more as a distribution point & strategic asset for ads, search, maps, other apps) which meant it played a fundamentally different game from Apple. Its early products where crappier from a user perspective, but it grew much faster.

Blow Out Distribution To Lock In Share
In the early days of the Facebook platform, Zynga projected out the ongoing rise of LTV for social gaming users, allowing it to pay significantly more for user installs than its competitors. Once it had massive market share, Zynga cross promoted games it developed - effectively using its distribution to bootstrap more distribution. Zynga could then more or less copy competitors' games, launch a month later, but still win on market share via aggressive distribution.

This approach of blowing out distribution channels in a market share grab can be very effective if products are reasonably interchangeable from the customers perspective.

Sell While The Space Is Hot
Sometimes it is clear you lost as second mover, but the market is really hot for a brief period. Rather than raise a monster funding round and get locked in, it might be wise to sell while valuations for your niche are out of whack.

Wait For The First Mover To Get Bought (Or Kill Itself)
Alternatively, if your market is undergoing consolidation there are times when being the last independent company standing can be to your benefit. Acquirers often screw up mergers or destroy products.

Furthermore, your competitors may take themselves out via poor execution. For example Cisco's two early competitors were Synoptics and Wellfleet. The pair merged to form Bay Networks with the idea that the combined forces would outgun Cisco. Instead, the merger led to ongoing corporate infighting, factionalism, and cultural clashes, leading Bay to defocus on execution. This cleared the competitive arena for Cisco to become the huge player it is today.

Monday, October 1, 2012

"We were so used to trying not to die, that we didn't realize we were winning."

-Entrepreneur and friend who sold his company right as they hit a steep revenue ramp.

Startup founders may have 2 mindsets:
1. Trying not to die.
2. Trying to dominate.

Early in the life of a startup, the founders dream of dominating their industry. But things may take a wrong turn. The founders may shift from being ambition-driven into "try not to die" mode. Founders may run into issues like - How do you meet payroll? How do you keep the two key engineers from quitting? What should you do if you can't raise any more money? Many companies go through a period of holding on the edge of a cliff with their fingernails, before pulling themselves up to safe land.

While this crisis mode can be focusing short term, it can often lead to a startup to fail or to sell too early relative to its trajectory. A founder can get stuck in "try not to die mode" even after the crisis has passed. This mindset of weakness or crisis leads to poor behavior - growing the team too slow (or continuing to shrink the team once the crisis has passed), bad negotiation with partners, or selling the company when you don't have too (or too early).

SNAP OUT OF IT!
As an entrepreneur, you need to consistently take a step back and ask yourself a few key questions. Get a third party's opinion on this if you have trouble being objective[1].

Should I be in crisis or growth mode? How do my recent numbers *objectively* look?

How have key metrics been growing over the last few months? Is the team also growing fast enough to capture the opportunity?

If I didn't go through hell recently, would I interpret the *current* state of the company differently?

What is my cash position? How much time do I have left if I project burn and growth?

If you just came out of a really rough patch and are in the wrong mental space to ask the questions above, take a few days off. Yes, you. You can take a few days off. Really. The crisis is over. Regain some perspective. You have a lot of fire in your belly. Recharge the fire, get back at it, and do great things.

If you decide you are just too worn out after a few tough years and want to wrap up your company, that is OK too. But it is worth taking the time to take an objective assessment of what is going on.

Avoiding perpetual "try not to die mode" is the only way to rediscover the ambition and drive to shoot really big. Not every crisis needs to have long term existential implications for your company.